Investing Archives - Page 10 of 10

What Are The Different Ways Of Investing Your Money?

If you have a few extra dollars lying around in your budget after you pay all your bills and do some basic saving, you may be wondering what to do next. You may even hear your friends or colleagues talking about investing, but you might not know where to start. I'm here to help. Now I'm not going to give you specifics about which investments to choose. But I will provide some guidelines for investing as well as some examples of different ways of investing money.

Taxable vs Tax-Advantaged Investing

The first thing you might want to know about investing is that there are two major categories of investing: taxable and tax-advantaged.

Tax-advantaged investing uses some type of tax related retirement account (or retirement “savings vehicle”), which encourages you to you save for retirement by helping you avoid taxes.

If your goal for investing is a comfortable retirement, and thus, you don't need the funds till you retire, then you should strongly consider a tax-advantaged account. Common accounts to choose from are the 401k and the IRA.

Taxable investing is anything other than tax-advantaged investing. If you don't open up a special account to invest in, then you are just doing normal taxable investing. Taxable investing is very flexible since there is no special account to hold the funds in. You can move your money in and out as you please.

Most investors do a combination of both. Invest the maximums into their tax-advantaged accounts each year, and then start pouring money into taxable investing.

Diversified vs Speculative Investing

Another concept you should learn about before investing is the idea of diversification. This is the act of putting your investment dollars in multiple assets to achieve proper asset allocation. There's lots of debate as to what that looks like. But the idea is to spread your money around so that if one investment fails it won't wipe out your whole portfolio, yet you'll still achieve decent results.

Therefore, diversified investing, involves putting your money in several different asset classes, and seeking a modest return without great risk.

Speculative investing is a little harder to define. But like explicit or objectionable material, you know speculation “when you see it”. Speculation is putting your money into assets where their is a lack of knowledge about the investment, a high level of risk, or simply where you have too much of your portfolio in one asset class. Some could argue that all stock investing is speculative. But for simplicity sake, I'm defining it this way.

The bottom line is that if you want to seek a decent return over the long-haul and preserve your capital (i.e. hold on to your money), you should be involved in diversified investing, and not be a speculator.

Different Types of Investments

Armed with the knowledge of these investing subjects, you're ready to go out and start investing. But where should you put your money? Here are some of the most common investment types (or asset classes) for you to consider.

Stocks – Buy stocks of ownership in a company. Your investment grows as the company performs well.
Bonds – Buy a debt security from a company or organization. You get paid when they pay their debts.
Cash – Buy into currency, money market funds, and CDs. Your money is stable and most of the time insured from loss.
Funds – Buy groups of stocks or bonds called funds. Common funds are mutual funds and index funds.
Real Estate – Buy land. A real asset you can put your hands on.
Businesses – Buy equity in a business. You get paid as the business grows.
Personal – Buy an education, a new suit, or a car to get you back and forth to work.
Other Assets – Buy art and collectibles. Hang your investment on the wall.
Commodities – Buy gold, silver, or platinum.

Which combination of the above you choose will depend on your understanding of the types of assets and your personal risk tolerance.

How do you invest your money? What strategies do you use? Which asset classes do you invest in and why?

This guest post comes from PT. Learn more about investing and see reviews of the best online stock brokers at his blog, PTMoney.com.

How To Open A Roth IRA And Where To Open An Account

By Mr. Money 1 Comment

You've finally been convinced that opening a Roth IRA is a good idea, and you've decided to take the plunge. Great! But what's next? How do you open an account, and where are some good places to hold your Roth IRA?

Today I'd like to cover the basics of opening a Roth IRA and look at a few good low cost brokerages where you can keep your account.

Take Care Of The Basics Before Your Roth IRA

Before we even jump into the basics of opening a Roth IRA, I suggest that you first get the rest of your financial house in order. That means doing the following things:

Save up an emergency fund: We've saved up 12 months of expenses to cover just about any eventuality that might come up. I'd suggest you save at the bare minimum $1000, but even better – 3-6 months of expenses.
Pay off all debt: I suggest you pay off all debt that you might have. If you don't any gains you might realize by investing will be offset by large debt interest payments. Get it paid off ASAP!

Once you've paid off all your debt and saved for a rainy day, you're probably read to start investing. At our house we follow the Dave Ramsey plan – but not to the letter. He suggests investing 15% of income. We're going to invest closer to 20-25%.

So what's an easy way to get started investing? When you've paid off all your debt, take the money you were paying on that debt, and instead start investing it.

My suggestion for investing is as follows. Invest in a company 401(k) or other employer sponsored plan up until the match (100% return!). After the match switch over to the Roth IRA (which we're talking about today!). After the Roth IRA switch back over to your 401(k) until it is maxed out. So again – this is the order:

401(k) til employer match is reached.
Roth IRA til maxed out.
401(k) (or other plan) til maxed.

How To Open A Roth IRA

Opening a Roth IRA shouldn't take very long, and in most cases can actually be done in a half hour to an hour.

When opening an account usually you'll need the following information – although it may vary a bit from institution to institution.

Social security number.
Bank account information.
Information about employment.
Money to open the account. (You may need $25 or you may need $3000 depending on where you open your account. )
An hour or so.

Before you even open an account, however, you'll need to figure out what financial institution, mutual fund firm or brokerage you want to open your account with.

Banks

Your local bank or credit union can often open up an account for your Roth IRA. While having an account with your local bank is usually convenient, it isn't often the best option. The reason? The banks usually have limited investment options for your account, usually limited to CDs, money market funds, and other cash accounts. The fees they charge are also often higher than the fees you would find with a discount brokerage or full service mutual fund firm.

Full Service Mutual Fund Firms

Full service mutual fund firms are typically one of the better places to start your account because they will have a nice variety of mutual fund options with low expense ratios and varied investment options. They are quite often the best place to purchase index funds, target date retirement funds, mutual funds and similar investments. Some of the better options that offer Traditional and Roth IRAs and many investment options include.

The downside to investing at one of these firms is that they often have minimum investments that you can make, which if you don't have a lot to start your account with can mean you're not able to invest with some of the companies. Some will also charge more for individual trades, and have account management fees. Some of these fees can be waived if you make a certain minimum investment and/or if you commit to investing a certain amount every month. Before you sign up, make sure you know what the minimums, fees and other account terms are.

The key to opening an account with a mutual fund firm is to do your research and to know what you're getting into. Never invest in something you don't understand.

Discount Brokerages & Robo Advisors

If you're a more hands on investor or you like to invest in single stocks an online discount broker might be a good option for your account (I like to buy index funds at a mutual fund firm and forget it myself!). Discount brokerages will allow you to access stock trades, options trades, Exchange Traded Funds (ETFs), mutual funds and other assorted investments. Individual stock trades will usually cost in the $2 – $10 range, which is probably going to be cheaper than making stock trades at a mutual fund firm listed above. Some of the options I recommend:

Listing Of Mutual Fund Companies And Brokerages

To bring it all together, here's a list of some of the best mutual fund companies, discount brokerages, and their fees.

	Account Minimum	Mutual Fund Commission	Stock Commission	Annual IRA Fee	Reviews
OptionsHouse	$1,000	$9.95	$3.95	none	OptionsHouse Review
Motif Investing	$1000		$9.95 (per motif/bundle of stocks)
TD Ameritrade	none	$0	$9.99	none	TD AmeritradeReview
Zecco	none	$10	$4.50	$30
TradeKing	none	$14.95	$4.95	none
Scottrade	$2500	$17	$7.00	none	Scottrade Review
Vanguard	none	$0	$7.00	$20
tradeMONSTER	none	$15	$7.50	none
Fidelity	none	$0	$7.95	none
Schwab	$1,000	?	$8.95	none
ShareBuilder by Capital One	none	$19.95	$6.95	none	ShareBuilder by Capital One Review
Etrade	none	Up to $19.99	$9.99	none
optionsXpress	none	$14.95	$14.95	none

What To Invest In

The next most important thing to decide is what to invest in once you open your Roth IRA. If you're just starting out like I am I'd probably suggest to find a good index fund and some low cost mutual funds. If you're newer to investing as I am or if you don't want to be actively managing individual stocks/etc, starting out with a good index fund will probably be a good option. Depending on which Roth IRA account custodian you choose, your options for investments may vary. Again, do your homework, and choose one that works best for your situation.

Do you have a Roth IRA? What type of account custodian did you choose (mutual fund firm, discount brokerage, bank or credit union)? What types of things are you investing in? Tell us your thoughts on opening a Roth IRA in the comments.

Why Does The Investment Industry Like Mutual Funds So Much?

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Did you know that there are more mutual funds than there are stocks? Have you ever wondered why mutual funds are such popular investment vehicles? Conventional wisdom will tell you that mutual funds are popular because they are less expensive than stocks because they do not carry hefty commissions, they allow the little guy to invest in the markets because the start-up capital can be small, they offer diversification because they hold many investment positions, and finally, they are managed by professional money managers. Unfortunately, these are the reasons given to investors, but the truth is that mutual funds are popular because mutual funds are extremely profitable to the investment industry.

Mutual funds may seem inexpensive because the costs are hidden. Mutual funds are loaded with fees such as sales charges, management fees, and 12b-1 fees. Sales charges are front-end loads charged by the broker or advisor for buying mutual fund shares, and charges for selling mutual funds shares are back-end loads. These charges depend on the various classes of shares. For example, Class A shares usually have front-end loads and Class B shares usually have back-end loads. Front-end charges can be as high as 8.5 percent for Class A shares. This means that an investor with $10,000 is only putting $9,150 to work while $850 goes toward the sales charge. In addition to sales charges, someone has to manage the fund and therefore, also has to be paid a management fee. This fee can range from 0.10 to 2.00 percent per year and depends on the fund itself and its investment style. Another type of fee is 12b-1 which is paid to brokers or advisors to pay for marketing, distribution and service costs. The Financial Industry Regulation Authority (FINRA) allows funds to charge 12b-1 fees as high as 1.00 percent on an annual basis.

Adding up all of the fees, it is no wonder that mutual funds are popular on Wall Street. It’s a great business because everyone except the investor benefits from this investment vehicle. Unfortunately, for the investor, the returns are not as good as the investment industry promises. The average investor in a stock-oriented mutual fund generated 5.66 percent per year over the ten-year period ended December, 31, 2007, according to a study by Dalbar, Inc., a leading financial services market research firm. Notice that this doesn’t include the stock market decline in 2008.

But are all mutual funds bad? No, not all mutual funds are created equal. Saying that all mutual funds are the same would be equivalent to saying that all restaurants are the same. Mutual funds are simply investment companies that make investments on behalf of their investors. There are some mutual funds that delivered fabulous investment performances for its investors and did not charge outrageous fees. But the problem is that most of the investment public would never know about them because these funds don’t advertise much, and they don’t pay high commission fees to entice brokers and advisors to sell them. In other words, they don’t play the Wall Street game.

This is a guest post by Mariusz Skonieczny. Mariusz is the founder and president of Classic Value Investors, LLC, an investment management company. He is also the author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market.

Traditional And Roth IRA Contribution Limits And Phase Outs

By Mr. Money 1 Comment

A while back the IRS released their 2010 Traditional and Roth IRA contribution limits. It's a good idea to make sure and watch those limits from year to year to make sure you're investing the full amount possible.

As was expected in most circles the 2010 Traditional and Roth IRA contribution limits will stay the same for the upcoming tax year.

2010 Roth IRA And Traditional IRA And Contribution Limits

The Traditional and Roth IRA 2010 tax year contribution limits are $5,000 for those under the age of 50. If you’re over 50 you can put in a little bit more, you have the option of making catch up contributions to your account, up to the 50+ limit of $6,000.

Note: Remember, you can contribute to both a Roth IRA and a Traditional IRA in the same tax year, but you can’t go over your limit of $5,000-$6000 when the total contributions to the two accounts are added together. Example: If you were over 50 and contributed $2500 to a Roth IRA, you then be able to contribute only up to $3500 to your Traditional IRA.

Here’s are the Traditional and Roth IRA contribution limits for 2010 and for years past.

Year	Age 49 and Below	Age 50 and Above
2002-2004	$3,000	$3,500
2005	$4,000	$4,500
2006-2007	$4,000	$5,000
2008	$5,000	$6,000
2009	$5,000	$6,000
2010	$5,000	$6,000

Traditional And Roth IRA Phase Outs For 2010 Based On AGI

Traditional and Roth IRAs have phase outs if you make a certain amount of money. Single taxpayers with an annual Modified Adjusted Gross Income (MAGI) over $105,000 begin to see their contribution limit drop until at $120,000 it goes away completely. The limits for Married Filing Jointly investors are $167,000-$176,000.

IRA Type	Single	Married Filing Jointly
Roth IRA	$105,000 – $120,000	$167,000 – $177,000
Traditional IRA	$55,000 – $65,000	$89,000 – $109,000

Contribute To Your Traditional Or Roth IRA Until April 15th

One thing to keep in mind with the IRA accounts is that you can open a new Roth or Traditional IRA right up until tax day on April 15th. If you do make a contribution in 2011 before tax day, be sure to specify which tax year the contribution is being made for, 2010 or 2011.

Differences Between Roth IRA And Traditional IRA Accounts

The main difference between Traditional IRA and Roth IRA accounts is when you end up paying your taxes on the money. Traditional IRA account contributions are made with income before it has been taxed. Because the money is pre-tax your distributions will be taxed at withdrawal. Roth IRA contributions are made with income that has already been taxed. Because of that the money will grow and not be taxed at withdrawal. For a complete look at choosing between retirement accounts, check out the article we wrote earlier this week: What Type Of Retirement Account Should I Choose? Traditional IRA, Roth IRA And 401k.

Do you currently have a Traditional IRA or Roth IRA? Do you have both so that you can tax diversify? Are you contributing right up to the limit?

Things You Should Know About The 2010 Roth IRA Conversion Rules

By Mr. Money 3 Comments

Yesterday I wrote about retirement accounts, and talked about which ones are better for different situations. Today I want to talk about another issue that's been getting a lot of press lately, the 2010 Roth IRA conversion.

In the event you've been living under a rock and haven't heard about the Roth IRA conversion event this year, it is basically a one time event where people can convert their traditional IRA’s, SEP IRA’s, Simple IRA’s, old 401k’s, old 403b’s into a tax free Roth IRA account. Because of the conversion event, waves of people are expected to take advantage this year and convert their traditional taxable investment accounts into tax free Roth IRA accounts. Here are the details.

Should I Convert My Traditional IRA To A Roth IRA?

The first thing you need to ask yourself before you even start going down this road of converting your taxable retirement accounts is whether or not it's even a good idea for you in your situation. A lot of people hve explained the benefits or a Roth IRA conversion, while others are saying that the conversion event has been overhyped. Cynics might say it's just a way for our government to collect on future tax money today – at a higher rate than most people would have paid in retirement. Regardless of whether that's the case, there are some things you should consider:

Pay taxes now or later? Do you want to pay your taxes on the money you invest now, or when you retire? The amount of tax you pay can very quite a bit depending upon what tax bracket you fall into either now vs. when you retire. Problem with this – it's hard to know the future and know what tax rate you'll be paying in the future – and whether taxes will increase. (Where's my crystal ball when I need it?)
Is my income too high to contribute or convert to a Roth IRA in the future? If you're a high income earner and you you want to do a bit of tax diversification, this year may be one of your few chances to convert your traditional taxable account to a Roth because of income restrictions.
Do I want to spread out my tax liability from converting? As part of the conversion event people who convert will be able to spread out their tax liability over 2011 and 2012. More time to pay your taxes!

Reasons To Take Advantage Of The 2010 Roth IRA Conversion

Here are a few benefits of converting your taxable retiremenet account to a Roth IRA this year

AGI limit of $100,000 – rule removed: Previously singles and married couples making less than $100,000 were the only ones able to convert their taxable accounts to a Roth IRA. 2010 is big for so many because the $100,000 MAGI rule is lifted, making a conversion possible for even higher earning singles and couples.
Tax payments can be spread out: You'll convert to the Roth IRA in 2010, but the income to be claimed on your taxes and taxes owed can be deferred until 2011 and 2012. Converters can claim 50% of the conversion amount as income in 2011 and the other 50% in 2012. Remember, this is a one year provision for the 2010 tax year only.
Old 401ks can be converted directly to a Roth IRA: Have an old 401k from an old job? You can convert those this year as well.
Your assets grow tax free, and tax free withdrawals: Converting means the money will grow free of tax burdens, and you won’t have to have a minimum distribution requirement until you turn 70 1/2.

Contribution Income Limitations: Still There For New Roth IRA Contributions

One thing to remember about the Roth IRA conversion event is that just because high income earners can convert their taxable accounts, it doesn't mean they can also open and add new contributions to a new Roth IRA. If their income is over the IRA contribution phase out limits, they won’t be able to make new contributions to a Roth IRA.

How To Convert To A Roth IRA

Converting your taxable account to a Roth IRA will be alot like rolling over an old 401k to a Rollover IRA. If you’re not changing the investment company that your funds are with, it could be as easy as filling out a form. The key is to contact a financial professional who can give you advice for your specific situation.

Are you considering whether to rollover a traditional taxable account to a Roth IRA? Will you be deferring on the taxable income until 2011 and 2012? Have you decided not to convert? Tell us why in the comments!

What Type Of Retirement Account Should I Choose? Traditional IRA, Roth IRA And 401k

By Mr. Money 2 Comments

So you're finally out of debt, saved up an emergency fund, and are ready to start saving for retirement. The question that you have now is, what type of retirement account should you choose? An IRA, a Roth IRA or a 401(k)?

If you’re not familiar with these basic retirement account types, you may want to check out IRS Publication 590. It’s free, and it's pretty in-depth in explaining the differences between the accounts. But just to review for this article's purpose – here are the three account types:

Traditional 401k: An employer sponsored retirement savings plan that allows a worker to save for retirement and defer income taxes on the money until withdrawal.
Traditional IRA: A retirement savings plan that allows a worker to save and invest for retirement with pre-tax dollars. Withdrawals are taxed.
Roth IRA: A retirement savings plan where money is invested with post-tax dollars, and are not taxed at withdrawal.

So which account type should you choose for your situation?

IRA Or A Employer Sponsored 401k?

We know that there are some obvious differences in the account types, like tax differences, but there are other non-tax related differences as well.

The 401(k) will often offer a matching contribution from your employer: If your employer offers this, jump on it – it's an immediate 100% return!
A 401(k) often has limited investment options: 401(k) plans will often give you only a limited choice of pre-selected funds and they're often high cost actively managed funds. An IRA will usually give you access to more low cost index funds and other options.
401(k) plans probably usually charge significant administrative fees: A study done by the Investment Company Institute and Deloitte Consulting found that the median employer-sponsored retirement plan charges an administrative fee of 0.72% of assets. (That’s on top of the fees charged by the funds.) By comparison IRA providers usually don’t charge any admin fees at all.

When you examine these three points, I think most people would suggest this example investment strategy.

Put money in your 401(k) until you get the full employer match.
Max out your traditional IRA to take advantage of its lower costs and better investment options.
Go back to your 401(k) and max it out.
Invest via taxable accounts.

Roth IRA or Traditional IRA?

Now if you are able to contribute to a Roth IRA or a Traditional IRA you have something else to consider. Where do you expect your tax bracket to be when you retire? Depending upon where you think your tax bracket will be when you retire, you may want to make a different investing choice.

You think your tax rate will be the same: The ending value of your account will be the same whether you pay tax now or later (Roth IRA Vs. Traditional IRA). With all things being equal, if you expect your retirement tax rate to be the same as your current tax rate, a Roth isusually going to be better. The reason? Roth IRAs are not subject to required minimum distributions and your contributions (with the exception of amounts converted from a traditional IRA) can be withdrawn free of tax and penalty at any time.
If you expect a higher tax rate in retirement: It’s best to contribute to a Roth. Better to pay tax at a lower rate now, than later at a higher rate.
If you expect a lower tax rate in retirement: It’s best to contribute to a Traditional IRA. Better to pay tax at a lower rate later than at a higher rate today.
If you have no idea what to expect, diversify: If you're not sure where your taxes will be, tax diversify and do a little of both. A lot of people do this unknowingly when they contribute to a tax-deferred plan at work, and then a Roth as well.

Have you set up your retirement strategy? What plan did you settle on? Are you going with a 401k, IRA or Roth IRA? Are you tax diversified?

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